This week, Sen. Ron Wyden (D-OR) introduced legislation that would amount to a tax hike for some small businesses. More specifically, his proposal would phase out a 20 percent tax deduction for pass-through businesses—many of which are small—that was implemented as part of the 2017 Tax Cuts and Jobs Act.
But what exactly is a tax deduction and how will the move affect small businesses and the economy they drive?
Under current law, some pass-through small businesses—enterprises in which company earnings are taxed at the individual rate of the owner—are able to write-off 20 percent of qualified business income. In short, small business owners can shield one-fifth of their revenue from federal income taxes–effectively creating a tax cut.
The financial savings realized from the provision allow small businesses to reinvest that extra cash back into the company. During the years following the passage of the 2017 tax law, entrepreneurs used the money to hire more workers, upgrade facilities and provide employees with a compensation bump. Prior to the pandemic, the tax cut was used to build one of the strongest economies in decades.
Yanking the small business deduction from the tax code, as Sen. Wyden is proposing, will weaken Main Street as they continue to recover from the worst economic crisis in recent memory. Lawmakers should be offering small businesses a hand-up, rather than burying them in a deeper financial hole.